INDIA GROWTH STORY: INDIA:A strong growth story

While all segments in India's property market are booming, commercial real estate is leading the way

NINA SUEBSUKCHAROEN in NEW DELHI

The Indian property market has soared to giddy heights since 2005 when the country opened its doors to foreign direct investment for the first time. Since then, early birds have already booked significant profits on paper, according to Anshuman Magazine, the chairman and managing director for South Asia of CB Richard Ellis.

Prices have doubled and even tripled in certain prime areas, and while they could climb further in the short term, the percentage rate is bound to slow. ''In other places it will remain stable and in some areas where the supply has gone beyond demand it may also come down,'' said Mr Magazine.

While all segments of the property market have been doing well lately, commercial real estate has been the pace-setter. ''It's a very different market here, but the fact is all property values have gone up. The residential side has already increased quite a bit,'' he said.

''And in India what is happening is that a lot of people are talking about which city to buy. Every segment is undersupplied and there is quite a bit of scope, except there could be certain segments that are oversupplied in certain micro-markets, so you have to really look at the market point of view.''

The pace of India's growth and the sheer size of its population promise to bring tens of millions more people into the consumption mainstream, creating unparalleled supplies in many areas including real estate.

The South Asia office of CBRE has been attracting a lot of overseas institutional investment since 2005, primarily from American financial entities such as hedge and equity funds, along with some inquiries from Europe and the Middle East. ''But before anybody came in, the Singaporeans were the very first ones to invest but then the Americans are coming in a big way,'' he said.

The flow of American funds is not linked to the sub-prime crisis, having started before the US property market started to turn sour last year. A substantial amount has been focused on western and southern parts of the country in cities such as Bangalore, Chennai, Hyderabad and the capital, New Delhi.

''Their primary investment is in housing and offices, first offices then housing,'' said Mr Magazine. ''Housing has been increasing but now they are also looking at retail and everything else.''

The 2005 regulatory changes meant that 100% foreign ownership through an automatic route became permissible, provided the investment was to develop at least 25 acres of land or 50,000 square metres of commercial space.

Mr Magazine said authorities structured the rules to discourage speculation and encourage real development. ''Foreign institutions can't come in and buy an existing building, they have to develop it. The only exception is hotels. They can buy and sell existing hotels ... to encourage tourism but otherwise it has to be development work.''

The big change since 2005 and the apparent undersupply in practically every segment means that there is a huge amount of construction going on in the country with most contractors very busy.

''Foreign construction companies have been looking at India for quite some time and some of them are trying to form joint ventures,'' he said, noting that there are no rules barring foreign contractors from doing so.

Foreign individuals can buy apartments in India but it must be for personal use and even then need permission. It is not as simple as a foreigner buying and selling a condominium in Bangkok.

''You can't do that in India. This does not apply to non-resident Indians or people of Indian origin. But foreigners are buying in places such as Goa for example. You have to go through the whole process [of] rules and regulations.''

Basically, the rules mean that a foreign buyer would have to show some connection with India, whether it is conducting business in the country or some other purpose.

''I met an Italian at a party and he had bought an apartment at Gurgaon, he said it took some time,'' said Mr Magazine. ''But generally foreigners will buy in places such as Goa and Kerela, these are the places they buy holiday homes. But again it's not simple, it's not that you can buy and sell easily.''

However, once foreign buyers get approval to buy a property they are allowed to own the land plot on which it is built. Despite this, Mr Magazine noted that buying land is really a grey area because according to the rules no foreigner can buy agricultural land and most of the land is devoted to agriculture until its usage is changed through development.

For several decades pre-2005, overseas Indians had been badly burned in their property investments in India, being unable to evict tenants and having to eventually sell at a low price to the tenants or some other party willing to evict them.

The reason, Mr Magazine said, was that in the past taxes on overall income were so high, reaching as much as 80-90%, which led to landlords often entering into very sketchy one-page agreements or no agreements at all in order to dodge the taxes.

But things have changed and today, and with exemptions these taxes are now a maximum 30-33%. Those who bought and let out their properties previously, and made sure they had proper lease agreements that were registered, would find the eviction process easier.

''So today things have definitely changed, you still might have problems here and there but generally speaking it is nowhere close to where it was before.''